Consumers Leading the Way

Economic Outlook Developments

Consumers will likely continue to drive modest overall growth in the U.S. economy. Job markets, incomes, home prices and finances should sustain spending.

After being suppressed by historic declines in energy prices, inflation is expected to return to historical norms, but with significant divergences between services and goods.

Interest rates are expected to remain low, but with a gradual upward trend. The next Fed Funds rate target increase is forecasted in December, with only one increase forecasted in 2017. The dollar should hold its recent gains given the evolving monetary conditions in the U.S. relative to those abroad.

Capital spending growth picks up only gradually in the forecast. Business equipment investment is expected to remain subdued until excess inventories are reduced, capacity utilization improves, policy uncertainty diminishes and the worldwide economy gains some upward growth momentum.

Exports have begun a gradual rise with recent signs of stabilization in the international economy, but potential risks remain. Brexit will likely exert renewed attention in the coming months as Article 50 is triggered. China and Japan are expected to continue to grow at below average speeds compared to recent decades. High debt levels remain a long‐term risk globally.

Consumer spending continued to drive the U.S. economy in the third quarter, which grew 2.9% in the third quarter ‐‐ the fastest pace since the third quarter of 2014. Buoyed by an unemployment rate of 5%, steadily rising real incomes and
employment, rising wealth and the lowest overall financial obligations ratio since the early 1980s, spending by consumers remained at high levels, although at a more moderate growth pace than in the second quarter. Improvements in export
volumes added to real GDP growth during the quarter, but export prices declined sharply in August, especially for many commodities. Private non‐residential construction grew solidly during the quarter, although real business equipment
spending was down 4.5% from the third quarter of 2015. Interest rates at historically low levels supported continuation of the housing market recovery and generally strong home price gains. However, despite rising home prices, residential
construction investment declined for the second consecutive quarter as the recovery in single family housing starts remained tepid. Business inventory investment remained low, but a gradual inventory correction is likely to continue. Federal government spending showed broad‐based growth during the third quarter, while aggregate spending at the state and local governmental levels declined at a slower pace than in the second quarter.

After the above average third quarter, economic growth is expected to return to a moderate pace below the average of the last 2 years. Real GDP growth is forecasted to grow in the 1.5% to 2.0% range this year and next, below the 2.5% average growth during 2014 and 2015. Until private investment accelerates, labor productivity and labor supply growth are expected to keep annual GDP growth relatively modest. Highly activist central banks, virtually worldwide, will likely provide
plentiful liquidity to the international economy overall in the next year, but the effectiveness of activist monetary policies probably declines at extremely low interest rate levels. The forecast incorporates a gradual pick‐up in aggregate inflation
with sustained upward movement in services inflation and some eventual price increases in energy and non‐energy commodities.

The Federal Reserve is not forecasted to raise the Fed Funds rate target again until December, when inflation and labor market fundamentals are expected to be somewhat stronger and policy uncertainty somewhat lower. Long‐term interest
rates are also expected to edge higher based on the forecast for a modest acceleration in real GDP and inflation in 2017 from 2016. However, slow growth momentum in the U.S. economy overall relative to its long‐term and recovery norms
may make the U.S. somewhat above average in its vulnerability to economic shocks in the next year.

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